That’s what TrimTabs is expecting. They are out with some alarming data regarding the recent issuance of stock. While the laws of supply and demand don’t seem to be applying to commodities of late you can almost guarantee that the overwhelming increase in the supply of stock will keep a lid on stocks. A recent MarketWatch article reports:
Firms have recently issued far more shares of their stock (either through initial public offerings or secondary offerings) than they did even in the go-go years of the late 1990s and at the top of the Internet bubble in early 2000.
That’s not good news, from a contrarian point of view: The stock market historically has tended to perform poorly following periods in which firms have flooded the market with more shares.
Prior to May, according to TrimTabs Investment Research, the highest level of share issuance in a given month was $38 billion. May blew that record out of the water, with a monthly total of $64 billion.
Furthermore, that blistering pace has continued during the first two weeks of June, according to TrimTabs.
How bad an omen is this corporate eagerness to offer its shares to the investing public? Looking back through recent history, TrimTabs found that there have been just 12 months since 1998 in which total new corporate offerings totaled at least $30 billion. The average return for the S&P 500 index over the 90 days following those months was a loss of 4%.
Dissecting the data further, TrimTabs next focused on those months in which not only did total corporate issuance exceed $30 billion, but also those in which total corporate share purchases were less. The S&P 500’s average 90-day return following those months was a loss of 7%.
This more-narrowly-defined subset applies to today, unfortunately. According to TrimTabs, corporate new offerings since the beginning of May have been nearly five times greater than corporate purchases.
The recent surge in the supply of shares has also caught the attention of Ned Davis, the eponymous head of Ned Davis Research. He has found through his research that it is optimal not to focus on monthly totals but instead on a rolling 13-week window. On this basis, according to Davis, recent corporate issuance has been exceeded historically only by two other occasions — early 2000 and early 2008.
Those were “not great times to buy stocks,” Davis notes dryly.
Davis also draws an even more ominous parallel to the recent corporate rush to sell stock: “This high level of [recent] supply is one of the key characteristics of the monster rally in November 1929 – April 1930.”
From April 1930 through the low in July 1932, of course, the Dow Jones Industrial Average fell by 86%.
For the record, I should point out that Davis, despite these ominous portents, remains cautiously bullish for the short-term, since many of his other indicators suggest that this rally has further to run.
But TrimTabs is quite bearish, recommending that clients be 50% short U.S. equities. “Stock prices are going to fall hard,” they predict.
On a similar note, Richard Russell has turned equally bearish as the transports failed to confirm the recent high in the industrials and appear to be giving a Dow Theory sell signal. Russell recently said:
I just went over my figures — Lowry’s Buying Power Index has been declining steadily since May 8. At yesterday’s market close, Lowry’s Buying Power Index (demand) was only 24 points higher than it was at the March 9 lows. Furthermore, volume is drying up. This is extremely negative action. Whenever buying power contracts during a rally in a bear market, the prevailing primary bear market forces immediately take over. For that reason, unless the trend of declining buying power soon halts and reverses, I believe that the March 9 lows will be attacked and violated.
Consequently, I advise my subscribers to assume a highly defensive position in their portfolios. If you are still loaded with stocks, cut back and get ready for the “hard rain.” What we’re seeing now is just the early drizzle.
The new reality.
The 77 million “baby boomers” are not going to have the easy retirement “fun time” they envisioned as late as last July. There’s a new reality coming of “work more, spend less.” Baby boomers will be dealing with higher food costs, rising taxes and fewer jobs available and more competition for those jobs.
I continue to grade the primary trend of the stock market and the economy as bearish. In order for a counter-trend rally in a bear market to be sustained, it requires steady or rising buying power plus short covering.
I’m asked “What’s the best thing you can have today, financially speaking?” My answer “A secure job that makes you a living. And if it’s your own business, so much the better. After all, if it’s your business you’re less likely to receive a pink slip.”
For years I’ve noted that Americans 65 or under, have never experienced what I call “hard times.” That experience is coming up — and it’s just starting now.
Great stuff from Russell and TrimTabs.
Sources: Dow Theory letters and MarketWatch
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.